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| Volume 8, Issue 12 |
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In This Issue:
 Stopping a financial crisis, the Swedish way
Pressured to take more risk, Fannie reached tipping point
Like J.P. Morgan, Warren E. Buffett braves a crisis
End of an era on Wall Street: Goodbye to all that
 [Advice from 400 CFOs] Dear Mr. President
Nine things to ask your future boss, the CEO
Cash-thirsty banks swarm the Fed
Finance execs adjust cash strategies
 Getting more from lean: Seven success factors
 Flawed metrics [income statement vs. balance sheet]
The bailout: An owner's manual
Next: the mother of all bank runs?
National road to bankruptcy
America's biggest billionaire losers
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Stopping a financial crisis, the Swedish way
Swedish National Debt Office
Bo Lundgren, finance minister during the 1992 crisis.
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A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?
It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent. But Sweden took a different course than the one now being proposed by the United States Treasury. And
Swedish officials say there are lessons from their own nightmare that Washington may be missing. Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to...
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Pressured to take more risk, Fannie reached tipping point
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“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae
When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business. Already a decorated marine and a successful executive, he wanted to be a role model to his four children — just as his father, the television journalist Roger Mudd, had been to him. Fannie, a government-sponsored
company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.
But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were
threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans. So Mr. Mudd made a fateful choice...
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Like J.P. Morgan, Warren E. Buffett braves a crisis
In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain.
Their times and personalities are vastly different, of course. But J. Pierpont Morgan’s role in the Panic of 1907 has its echo in Warren E. Buffett’s actions during the current financial troubles. “What Buffett is doing is similar in ways to what Morgan did in 1907,” said Richard Sylla, an economist and financial historian at the
Stern School of Business at New York University. “It’s what you might call profitable patriotism.” Comparing the two men and their moves in periods of market turmoil, just more than a century apart, reveals how much some things have changed over the years and how other things have not, according to business historians and finance experts...
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End of an era on Wall Street: Goodbye to all that
JUST before midnight 10 days ago, as a financial whirlwind tore through Wall Street, someone filched a 75-pound bronze bust of Harry Poulakakos from the vestibule of his landmark saloon on Hanover Square in Manhattan.
Digging into a bowl of beef stroganoff the day after the bust disappeared — it was eventually returned anonymously — Mr. Poulakakos recalled some of the customers who had passed through his doors since he opened his bar, Harry’s, 36 years ago. Ivan Boesky once had a Christmas party there. Michael Milken worked over at 60 Broad. Tom
Wolfe immortalized the joint in “The Bonfire of the Vanities.” Mr. Poulakakos says he even got to know Henry M. Paulson Jr., the former Goldman Sachs chief executive and now the Treasury secretary. Mr. Poulakakos, 70, has also seen his share of ups and downs on the Street, including the 1987 stock market crash, when Harry’s filled up at
4 p.m. and stayed open all night. But the upheaval he’s witnessing now — much of Wall Street evaporating in a swift and brutal reordering — is, he said, the worst in decades. “I hope this is going to be over,” he said. “If Wall Street is not active, nothing is active.” Mr. Poulakakos, rest assured, isn’t planning to disappear. But the
cultural tableau and the social swirl that once surrounded Harry’s are certainly fading. “It’s the beginning of the end of the era of infatuation with the free market...
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[Advice from 400 CFOs] Dear Mr. President
Both as businesspeople and citizens, CFOs have plenty of advice for the next occupant of 1600 Pennsylvania Avenue.
On November 4, the nation will choose either Democrat Barack Obama or Republican John McCain as its 44th President. The winner will inherit a mess. Wars in Iraq and Afghanistan, a crisis in the credit markets, a painful housing bust, and soaring energy and commodity prices head the list of thorny problems awaiting the successor to
George W. Bush. How should the next President deal with those problems? When we asked nearly 400 CFOs what advice they would offer, we discovered that they have plenty to say. Moreover, their comments make it clear that, regardless of political affiliation or what color state a CFO may live in, finance executives are following this election
very closely. You might even say passionately, given the intensity of many of their responses. Not surprisingly, most CFOs are deeply concerned about the economy. They want it fixed, and fast, with lower taxes and less regulation the most proffered advice. But they are keenly interested in other issues as well, and far more likely to
diverge in their prescriptions. Many want a clearly articulated, multifaceted energy policy, for example, but some emphasize offshore drilling while others prefer incentives for alternative energy. A few call for deporting all illegal immigrants; others want to speed the legalization process. As for the war in Iraq, many finance
chiefs want the next commander-in-chief to withdraw U.S. troops, while others urge him to "damn the torpedoes" and "stay the course." Clearly, there are no easy choices ahead. Perhaps one CFO summed it up best when he simply offered "Good luck." [Find out what these 400 CFOs are thinking...]
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Nine things to ask your future boss, the CEO
Since knowledge is power, know all you can about your prospective superior's habits, history, likes, and dislikes.
How to find that great next CFO job? Here is one tactic that you might overlook but should not: Interview your future boss, the CEO, as if he or she were the job applicant, not you. Because when it comes to your career, knowing as much as possible up front about the company and person you might work for is probably more important
than dazzling them with your résumé, presentation skills, and personal charm. Nobody, most of all you, wants that supposed dream job to turn into a nightmare, and one that ends with a rude awakening — another job search, and a lot sooner than you'd thought. Besides, CFOs can rightly feel emboldened to question the CEO, who probably needs you
as much as or more than you need the job, according to Eric Rehmann, co-managing director of the financial officers practice for recruiting firm Korn/Ferry International. (Rigorous due diligence, albeit on your own behalf, should impress any savvy CEO, anyway.) "There aren't enough good CFO candidates to go around," says
Rehmann. "The best ones have multiple choices." While a few straight-forward questions are obligatory and possibly useful, you'll probably discover the most revealing information about your prospective CEO and organization through indirect questions — that is, those that appear to be about one topic but really are meant to...
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Cash-thirsty banks swarm the Fed
The level of borrowing from the Federal Reserve hits an all-time weekly high that is twice the previous record.
Consumers and businesses looking to borrow money are not the only ones being shunned by banks — the banks themselves are being shut out as well. As a result, they are going to their lender of last resort: the Federal Reserve Bank. U.S. banks are borrowing money from the Fed's discount window at a record pace. According to Reuters,
banks borrowed $367.8 billion per day from the Federal Reserve in the week ended October 1. That was nearly double the previous record daily average of $187.75 billion — which was set the prior week. With the interbank lending markets currently frozen and commercial paper markets in a state of semiparalysis, the Fed is the only game in
town at the moment. "It gets more and more stunning," Michael Feroli, an economist at JPMorgan Chase, told Reuters. "You're just seeing huge increases across the board. It tells you that the paralysis is massive." CNBC theorizes that banks are upping their borrowings to meet...
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Finance execs adjust cash strategies
The financial crisis has forced quick action by finance departments concerned about their access to capital.
In just one month's time, businesses of varying sizes and industries have seen their access to short-term credit dwindle, forcing their finance executives to quickly rejigger cash strategies. Nearly two-thirds of companies have taken at least one action to address their diminished ability to borrow, according to an Association for
Financial Professionals survey of 366 treasurers and CFOs during the past week. The most common measures include moving most or all short-term investments to bank deposits and U.S. Treasuries (41 percent), reducing capital...
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Getting more from lean: Seven success factors
Why do some companies such as Toyota succeed at lean, while other companies struggle? What do companies with the best outcomes do differently than their less successful peers?
To find the answers, BCG conducted extensive interviews with a wide range of companies with varying degrees of lean experience, and combined these insights with our own observations from helping clients achieve success in their lean initiatives...
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Flawed metrics [income statement vs. balance sheet]
Partha Mohanram is the Philip H. Geier Jr., associate professor of business at Columbia Business School. He is currently working on research that demonstrates that the stock market fails to appreciate the difference between productivity-driven growth and investment-driven growth in earnings.
While everyone is looking for reasons why this nation is in a financial mess, let me toss another one into the ring. We're in this situation because we've focused almost exclusively on the income statement and ignored the balance sheet.
An income statement indicates how revenues are transformed into net income, or profits after taking expenses into account. The balance sheet lays out the assets deployed in the operations to generate the revenues that drive profits. The critical factor for any firm's success is its profitability, i.e., how much profit is the firm making
relative to the amount of assets that have been deployed. Almost no one looks at profitability--we focus on raw profits instead, to our detriment. Who's "we"? It's the manager chasing growth in sales and earnings, without worrying about the resources
used to obtain the growth. It's the financial analyst who incessantly focuses on Earnings Per Share (EPS) targets without any concern for whether the targets were met by organic growth or by value-diminishing acquisitions. [What happens when
one ignores the balance sheet? First, one ignores the quantum of assets deployed for the generation of income. Consider...]
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The bailout: An owner's manual
Congratulations. If you're an American taxpayer, you've just become the owner of a brand-new $700 billion attempted bailout of the U.S. financial system.
After a 263-171 vote by the U.S. House of Representatives Friday, President Bush signed the legislation, aimed at rescuing the freezing credit markets in an effort to shore up the failing economy. Actually, it's a bit bigger than $700 billion. The version of the bill that passed Friday contains some expensive add-ons, including a
provision that keeps the alternative minimum tax (AMT) from encroaching upon the middle class in 2008, clean-energy tax incentives, disaster relief and the extension of expiring tax cuts for businesses and individuals. It also expands government
insurance on bank deposits from $100,000 to $250,000 through 2009. You probably have questions. So do we. A guide:...
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Next: the mother of all bank runs?
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Nouriel Roubini, a professor at the Stern Business School at NYU and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan.
The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety;
credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package. Financial institutions in the U.S. and in advanced
economies are going bust. In the U.S., the latest victims were Washington Mutual (nyse: WM - news - people ) (the largest U.S. savings and loan) and Wachovia (nyse: WB - news - people ) (the sixth largest U.S. bank). In the U.K., after Northern Rock (other-otc: NHRKF.PK - news - people ) and the acquisition of HBOS by Lloyds TSB
(nyse: LYG - news - people ), you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis (other-otc: FORSY.PK - news - people ) going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue. So, this is not just a U.S. financial crisis. [The
next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of
their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started...]
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National road to bankruptcy
Most Americans are just now starting to get an inkling of how serious the financial crisis is in this country. In fact, although it is most dire here, it is dragging down the entire world economy.
To hear Wall Street and most of the financial media tell it, this mess was caused by stupid or careless corporate executives doing risky things without thinking through the consequences. Nothing could be further from the truth. Just so you know that these periodic financial disasters are not accidents, let's take a look at some history
before examining today's situation. We'll use Citigroup (nyse: C - news - people ) as the poster child. It may not be the worst offender, but it's an easy one to follow, and I'm familiar with its story. In 1991, when the core of what is now the investment
banking business of Citigroup was still Salomon Brothers, the company manipulated the Treasury bond market by...
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America's biggest billionaire losers
Feeling crushed by the fall in the financial sector? Worried about your investments? You're not alone.
As Wall Street faced a wipeout this year, some of America's richest people got sucked into the vortex too, losing millions. Take Maurice Greenberg. When we published our 2007 Forbes 400, he was the 135th wealthiest American. His net worth was $2.8 billion. As a former chairman of AIG (nyse: AIG - news - people ), much of his net worth was
tied up in company stock. He should have diversified. Last week, AIG sold most of itself to the U.S. government for a fire-sale price to obtain some much needed liquidity. Greenberg's spot on this year's Forbes 400 list? He doesn't have one. He continues to take a drubbing. Since we calculated net worths for this year's Forbes
400 list in late August, the value of Greenberg's AIG stock has declined a further $750 million. "In a little over a year, I, and other shareholders, have watched...
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